Thornburg International Growth ADR Strategy

2nd Quarter 2019

Greg Dunn
Greg Dunn
Portfolio Manager and Managing Director
Sean Koung Sun, CFA
Sean Koung Sun, CFA
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
JULY 19, 2019

The Thornburg International Growth ADR Strategy–Wrap returned 1.06% (net of fees) in the second quarter of 2019, trailing its benchmark, the MSCI All Country World ex-U.S. Growth Index, which gained 4.36%. This brings the 2019 year-to-date return to 15.38% for the strategy (net of fees), versus 17.21% for the index. Since inception, the strategy has returned 5.76% versus 5.71% for the index.

Although international equities finished the quarter in positive territory, global markets experienced an acute bout of volatility in May as the U.S. unexpectedly ratcheted up trade tensions with two of its largest trading partners, Mexico and China. Markets were further pressured as investors digested soft economic data suggesting weakening trends in global growth. We saw Treasury and other foreign sovereign yields decrease notably as investors clamored for safe haven assets. It was only after trade tensions de- escalated as tariffs were called off on Mexico and a temporary truce was achieved with China at the G-20 Summit that markets settled and turned. Furthermore, U.S. and European central bank policy makers signaled a more accommodative policy stance, helping to boost investor confidence. Uncertainty lingers around the eventual outcome of trade negotiations and continues to weigh on valuations of certain foreign equities. The global economy seems late in the cycle, but whether growth remains resilient, albeit at lower levels, with the proper policy and political actions or whether an already softening economy will be further harmed by adverse events remains to be seen.

Past performance does not guarantee future results. To obtain the calculation methodology and a list showing the contribution of each holding in the representative account to the overall account’s performance during the reporting period, please email a request to bdg@thornburg.com. The holdings identified do not represent all of the securities purchased, sold or recommended for advisory clients.

Top performers for the quarter included German digital payments platform Wirecard AG, global footwear and apparel company adidas AG, American global travel technology company Expedia Group, Inc., global payments company Mastercard, Inc. and U.K. investment management services provider Hargreaves Lansdown plc.

Wirecard shares rallied in the quarter as SoftBank announced a €900m investment in the company, representing about a 5.6% stake, via a convertible bond issue. Wirecard also reported financial results reflecting better-than-expected organic revenue growth as well as a slight upgrade to full-year EBITDA guidance.

Adidas shares have re-rated as investors have come to better appreciate its expanding economic moat and its positioning as a long-term winner in a structurally attractive global sportswear market. Adidas remains well placed to outgrow the broader market, expand margins and return meaningful capital to shareholders.

Expedia is the world’s largest online travel agency by bookings. Expedia operates in what is effectively a duopoly market and recent investments and acquisitions stand to add to the company’s existing platform scale. Shares traded up on an improving macro outlook following a softening stance from the Federal Reserve, which could encourage more consumer discretionary spending.

Mastercard continues to execute well with robust organic growth and improving margins and has a long duration secular growth opportunity ahead as payments steadily shift toward more digital forms over time.

Hargreaves Lansdown rose as it reported results that exhibited a resilient level of flows, taking the stock past our price target.

Bottom performers this quarter included U.K. online food delivery marketplace Just Eat plc, Chinese search engine operator Baidu, Inc., U.K.-based fashion e-commerce retailer ASOS plc, video game publisher Ubisoft Entertainment SA and leading global luxury goods e-commerce platform Farfetch, Ltd.

Just Eat shares declined as the company reported order growth in the U.K. that fell slightly short of expectations due to unfavorable weather and Easter timing. Furthermore, it was reported that one of the FAANGs is planning to invest $575 million into Deliveroo, a U.K.-based food delivery rival, ramping up competitive concerns.

Baidu fell as the company provided financial guidance to the markets that implies a troubling and dramatic slowdown in revenue growth in their core search business due to a combination of a challenging macro and competitive environment.

ASOS shares have suffered as retail and apparel market data from the U.K. and Germany suggest very weak industry growth and underlying consumer demand. Investors are also concerned that rumors of cost cutting and a restructuring plan at the company imply another profit warning.

Ubisoft is one of the largest video game publishers in the world. Ubisoft’s share price was down as fourth quarter revenues missed company guidance. Additionally, competition remains tough for traditional video game makers with the popularity of free online games, such as Fortnite. Longer term, we believe Ubisoft is attractively valued versus its peers.

Farfetch declined despite reporting strong first-quarter earnings on concerns about worsening macro trends in China, as well as trade war fears. For Farfetch and the luxury goods market overall, China is the most important and fastest-growing region, which underpins the long-term secular growth story but creates noise near term..

NOTABLE PURCHASES
(Mar 2019–May 2019)
NOTABLE SALES
(2Q19)
HUYA, Inc. EssilorLuxottica
Expedia Group, Inc. Commerzbank AG
Micron Technology, Inc. Merlin Entertainment
Capgemini SE Domino’s Pizza
Mercari, Inc. Hargreaves Lansdown plc
SEA Ltd. Zalando SE
Alsea S.A.B. de C.V.
Auto Trader Group
Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.

Outlook
Investors will be watching closely whether this latest ebb in trade tensions is just a temporary pause before talks break down as both sides take on entrenched positions or if parties are genuinely making progress toward a resolution that is ultimately in the interest of all groups involved and the global economy at large.

Although we are seeing a downtrend in various business and consumer confidence indicators, we remain optimistic that despite the continuing economic and trade risks, the global economy will prove more resilient than expected. Across the major developed markets, we see labor and employment conditions as healthy with broadly rising incomes. In the eurozone, for example, unemployment now stands at 7.6%, not far off from pre-crisis levels. Although select labor markets in advanced economies are considered tight, inflation trends broadly have been relatively muted. We believe this will allow the strong dovish signaling we’ve seen from major central banks to become more than mere words, but concrete policy actions.

The Chinese economy heavily influences global trade and business cycles and last year’s growth slowdown on the back of a deleveraging campaign was felt broadly. Although Chinese growth rates are on a structural downtrend, we expect recent stimulus actions to prop up growth. Initially, the measures should offset some of the slowdown and then on a lagged basis later this year, provide a tailwind that will translate into a slight rebound in global growth. Much of that incremental Chinese growth will benefit Europe, particularly the region’s industrial sectors, and the emerging markets more so than the U.S. We believe this backdrop helps the case for favoring select foreign equities with strong fundamentals.

As we enter late-cycle conditions, a slowing global economy appears underway. We believe these conditions will favor stock selection and the companies that will outperform are the ones we tend to favor: high-quality growth companies that can transcend the economic cycle through secular growth opportunities, superior execution and growing economic moats.

Through our repeatable bottom-up process that relies on deep fundamental research, we are, even in this environment, finding opportunities to deploy capital into businesses with franchise characteristics and durable growth drivers that can deliver compelling risk- adjusted returns over time.

We thank you for investing in the Thornburg International Growth ADR Strategy–Wrap.

Important Information

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 6/30/19.

Performance data for the International Growth ADR Strategy is from the International Growth ADR Wrap Composite, inception date of May 1, 2010. The International Growth ADR Wrap Composite includes discretionary wrap accounts invested in the International ADR Growth Strategy. Returns are calculated using a time-weighted and asset-weighted calculation including reinvestment of dividends and income. Periods less than one year are not annualized. Individual account performance will vary. The performance data quoted represents past performance; it does not guarantee future results. “Pure” Gross returns do not reflect the deduction of any expenses, including trading costs and are supplemental to net returns. Beginning January 1, 2009, net returns reflect the deduction of the maximum total wrap fee which is currently 3% per annum. Net returns are derived from subtracting 1/12th of 3% from each account's monthly gross return. The total wrap fee includes all charges for the trading costs, portfolio management, custody and other administrative fees. Prior to January 1, 2009 net returns reflect actual wrap fees for each account in the composite. Beginning January 1, 2014 returns reflect the deduction of transaction costs for some accounts in the composite. The standard fee schedule currently in effect is: 1% to 3% on all assets. Fees may be negotiated in lieu of the standard fee schedule. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. The firm's fees are available upon request and also may be found in Part II of its Form ADV.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Holdings may change daily and may vary among accounts.

The information provided herein should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Portfolio holdings and characteristics shown herein are from a representative account managed within the investment composite. The representative account is selected based on account characteristics that Thornburg believes accurately represent the investment strategy as a whole. Should these characteristics change materially, Thornburg may select a different representative account. Holdings may change daily and may vary among accounts, which may contribute to different investment results. The representative account information is supplemental to the strategy’s composite and GIPS compliant presentation.

Portfolio construction will have significant differences from that of a benchmark index in terms of security holdings, industry weightings, asset allocations and number of positions held, all of which may contribute to performance, characteristics and volatility differences. Investors may not make direct investments into any index.

Please see our glossary for a definition of terms.

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